Thursday, 5 July 2012

Why Government Intervention Hinders Progress and Innovation

‘The success of Asian economies such as Korea didn’t happen through the ideological miracle of economic bushfires, where the conditions need to be just right for their creation naturally. ‘They were deliberately built through considered and targeted government policy – picking winners and planning for long-term growth. ‘The Samsung story itself is incredible. ‘Driven by government-sponsored credit and policy vision, Samsung now accounts for more than ten per cent of the country’s GDP.’ - Paul Howes, National Secretary, Australian Workers Union

In one breath, Mr. Howes denies the existence of entrepreneurialism and creative destruction.

In Mr. Howes’ (and other central planners’) world, it’s government that creates jobs.

They believe that a nation needs a group of wise overlords to guide and direct the economy.

In their view, nothing happens without government intervention.

As they see it, governments come up with the bright ideas and it’s then up to the market to fulfil those ideas. If the market doesn’t do it, it’s not because the idea is rubbish, it’s because the market has failed.

But while Samsung may be a wonderful example of a government picking winners, let’s not forget the other side of the coin — the hundreds or thousands of South Korean businesses that failed, the money lost and the lives ruined because the government backed Samsung while not giving the same favours to others.

Or let’s look at an example of another global brand that received government support — Nokia.

Until recently, Nokia was the world’s leading mobile phone company. And it was Finland’s biggest company.

Government Intervention and the Lesson of Nokia

But having favoured status didn’t protect the company from error. It made two crucial business mistakes that would cause it to miss out on the two biggest trends in the mobile phone industry during the past 10 years.

First, it missed the trend towards ‘flip’ mobile phones. It stayed with the ‘brick’ style that had won it millions of customers over the years. But at the time consumers wanted compact and sleek phones. The kind you could neatly hide away in a pocket or handbag.

But as you know, technology changes quickly. The trend for compact and sleek phones didn’t last long. Perhaps if Nokia caught the next trend wave it would be fine.

But no, it missed that too. That was where consumers wanted theopposite of sleek and compact. Mobile phones (smart phones) became fashion accessories.

Consumers wanted big screens. The bigger the better. No longer were mobile phones stashed in pockets or handbags, now they were laid out on the table or desk where everyone could marvel at the size of your screen and the smallness of your pixels.

The result is that Nokia’s share price has fallen from USD$40 in 2008 to just USD$2.82 today.

Success and failure come and go quickly in business, especially in technology. So the idea that any business should account for 10% of a nation’s GDP (gross domestic product) isn’t a point of pride, it’s a point of concern.

Take an example close to home. BHP Billiton [ASX: BHP] and Rio Tinto [ASX: RIO] made combined revenues of $127 billion last year.

That’s about 10% of Australia’s GDP. Again, that may sound great, but not so much when those revenues are at the mercy of a slowing Chinese economy.

So South Korea, like Australia, isn’t a poster-child for positive government intervention. Rather they are poster-children for what happens when a government intervenes and manipulates to create a lop-sided and fragile economy.

Of course, the idea that government intervention creates prosperity is nonsense.

Government Intervention Hinders, Not Helps

Government’s don’t create opportunities…or plan for long-term growth. Governments hamper opportunities. And they only ever plan for short-term growth (even though they pretend they’re planning for the future).

That governments take the credit for progress, wealth and high standards of living is a falsity that must be corrected. Progress and wealth comes from freedom and opportunity, not from central planning and State intervention.

Tomorrow, we’ll explain how it hasn’t been the increase of government intervention powers that has created so much wealth and progress. Instead, it was the end of centuries of human oppression and the reduction in government involvement.

1 comment:

The more obvious counterpoint to Howes' argument is that if it were true North Korea, which has taken "considered and targeted government policy" to its ne plus ultra, would be even more successful than the South. The two Koreas, like the two Germanys after WW2, have provided a perfect scientific experiment to assess the contrasting results of free enterprise vs state control. And there are plenty of examples of the experiment at the enterprise level, e.g. BMW vs Trabant, that prove that Samsung has succeeded in spite of government control, not because of it.